L18: Taxes Affecting Real Estate Flashcards
“Ad Valorem” (property taxes) + Assessed Value
Ad Valorem = taxes are based on the assessed value of the property
Assessed value = value based on the value of other properties in the area + improvements made since purchasing. Done yearly by the county
To which level is property tax in FL taxed on?
Local level only: cities, counties, school boards
“In Arrears” (property tax)
Property tax is paid at the end of the year. Due from November 1 to April 1
Property tax exemptions (3)
1) immune properties (city, county, state & federal properties that don’t get assessed)
2) exempt properties (churches & nonprofits; subject but don’t have to pay)
3) partially exempt properties (subject but partially exempt)
Partially Exempt Properties (1/8)
Property Tax Exemption
1) Homestead Exemption (req: FL resident, hold title & permanent residency)
Exemption scale (value):
*0-50k, $25k exemption
*50k-75k, $25k exemption + exemption on city & county tax (dollar for dollar above $50k)
*75k+, $25k exemption + $25k exemption on city & county tax
Partially Exempt Properties (2to8/8)
Property Tax Exemption
2) widowed and not remarried, $500
3) blind or totally permanently disabled, $500
4) non-veteran quadriplegic or disabled first responder, 100%
5) veteran, 10%
6) disabled, $5k
7) service-connected totally disabled veteran, 100%
8) surviving spouse of veteran who died on duty, 100%
Taxable value formula
Taxable value = assessed value - Homestead exemptions
Save our homes amendment
property tax
SOH limits property tax increase to 3% annually
SOH is portable within 2 years & up to $500k
Tax Base
The total taxable value available in a specific area
Tax base = total assessed value - total exemption
Mill
1/1000 of a dollar, $0.001
Used to express tax rate in FL
Annual Property Taxes Due (formula) + property tax savings
Annual property taxes due = taxable value x tax rate (1/1000)
Property tax savings = total exemptions x tax rate
Special Assessment
- when additional taxes are levied on homeowners in a neighborhood or area to pay for improvements that benefit people living there
- can be voluntary or involuntary
Special Assessment = total special assessment cost x homeowner’s shares
Street Paving Assessment
Street Paving Assessment = ((front ft x $ per linear foot) x owner %)/2
Federal Tax Incentives for Homeowners (deductions, tot 7)
1) Mortgage Interest Tax Reduction (deduction limit $750k jointly, 375k single)
2) Home equity loan interest deduction (loan for home improvements, interest paid deduction up to 750k jointly, 375k single)
3) property tax deduction (10k between state, city & property taxes)
4) IRA withdrawals (people with no purchase in 2 years, can withdraw up to 10k from their individual retirement account for down payment on residence)
5) Point deduction (one discount point = 1% total value of loan, interest that is prepaid & can be tax deductible in the year they are paid)
6) mortgage pre-payment penalty deduction
7) exclusion from capital gains (money made from sale of property 500k married, 250k single)
Capital gain Formula
from the sale of property
Capital gain = realized gain - adjusted basis
Realized gain: sales price -selling costs
Adjusted basis: basis + cost of capital improvement + qualified selling costs
Capital improvement (to a property)
Upgrade or improvement to a property that falls outside the scope of normal repair and maintenance
Property’s holding period & capital gain Taxation
Holding period = how long property is held (owned) before being sold
Holding period < 1 year = short term capital gain (taxed as normal income)
Holding period > 1 year = long term capital gain (taxed at 0%, 15%, 20%, 25% or 28% + 3.8% net investment income tax, if applicable)
Foreign Investment in Real Estate Property Tax Act of 1980 (FIRPTA)
FIRPTA = regulates the purchase of RE property in the US from foreign sellers
Only applies to properties $300k +
Buyer must withhold 15% of sales price for taxes
Deductibles for taxable income on investment properties (for IRS)
- certain operating expenses (ie. running & maintaining property)
- property taxes (considered fixed operating expenses)
- replacement expenses paid during tax year
Debt service
Amount of money needed for a specific time period in order to cover the payment of principal & interest portions on a loan
Depreciation of investment properties (requirement & cause)
Requirements:
- must be owned by the taxpayer
- must be used in taxpayer’s business or income producing activity
- must have determinable useful life
- must be expected to last more than 1 year
Causes:
- physical deterioration
- functional obsolesce (outdated)
- external obsolesce (loss of value due to external factors)
Depreciation calculation & property’s useful life
Annual IRS DEPRECIATION deduction = depreciation basis/useful life
- Depreciation basis = purchase price + acquisition costs + renovation - land value
- Useful life:
residential, 27.5 years
commercial, 39 years
Improvement vs. repairs in investment property depreciation
Improvements = increase the basis, so it must be depreciated separately if done after property has been put in service. If done prior, basis needs adjustment
NB: adjusted bases = basis + cost of improvements + qualifying and closing costs - realize depreciation
Repairs = do not increase the basis and can be deducted in the year they were made
1031 Exchange (a.k.a. tax-deferred exchange)
Allows for a tax deferment when a property is exchanged for a similar one (investment property only)
Requirements:
– no property must be identified within 45 days
– new closing within 180 days from sale of original
– properties must be “like kind“
– cash has to go through qualified intermediate
– 2 year limit per exchange
Exchange can be “booted“
